Boosting equity markets tipped to aid growth

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While the Mighty River Power listing is being touted as a win for mum-and-dad investors, the head of the sharemarket sees it as a catalyst to kick-start the country's capital markets.

NZX chief executive Tim Bennett says the entrance of 100,000 to 200,000 new investors into the equity market by the middle of the year will be key to driving economic growth in the country.

He sees the high cost of capital as one of the major impediments to growth, with the Government's recent Growing Capital Markets report putting that risk premium at about 100 basis points above Australia and 80 basis points above the rest of the world (relative to the risk-free rate).

In real terms, that means investors are only willing to invest money in Kiwi companies if they can deliver annual returns that are at least one percentage point higher than the equivalent firm across the Tasman. "We're a small equity markets and if we're going to provide a lower cost of capital for New Zealand businesses we need more equity investors."

The upside of cheaper capital, Bennett says, is improved employment and higher investment in capital assets, which in turn delivers productivity and gross domestic product gains down the track.

The entrance of these new investors is also expected to boost the brokerage industry as people buy and sell shares, giving them more resources to provide deeper and wider analysis of New Zealand companies.

To date there is about $115 billion in retail deposits washing around the country's bank accounts, money Bennett feels could be better used as equity capital.

Some of that is expected to find its way into the market over the course of the year as Mighty River, Genesis Energy, Meridian Energy and possibly Z Energy list, but the real opportunity is the next tier of firms.

Bennett says many of the unlisted firms suitable for a stockmarket listing are owned by entrepreneurs nearing the end of their working lives, and an equity listing would allow them to realise the capital in their businesses.

Even if firms go through the pre-IPO assessments and choose not to list, he says the analysis would be valuable in other forms of sale.

Bennett says there is a need for better investor education.

Some of the education burden falls on financial institutions, like the NZX.

The firm is working to lift that level of financial literacy, but investors need to shoulder their fair share too, he says.

Many would-be Kiwi investors are still scarred by the 1987 crash, the global financial crisis and the collapse of the finance companies.